GUEST BLOG: The whites of an investor’s eyes

By Eamon Dwyer, managing director, City Life

As of last Friday, the world stock markets were down in value by 10% since Christmas Day 2015. However, the recent spike in (largely negative) volatility has without doubt spooked many investors, savers and pension funders alike.

With the 2008 market crash fresh in the memory, people are rightly wondering is history repeating itself. I wonder how they will act, or react, if this downturn persists.

Everyone is wondering what unknown financial nastiness lies out there. What do we know? Global growth seems to be slowing, Brexit from the EU is a distinct possibility, the oil price has collapsed and some major banks have too much exposure to this oil price collapse.

This list has been mulled over by the mainstream media in recent weeks and as we know from the stories of the shoeshine boy, when it gets to the point that everyone is talking about something, the markets have already accounted for this news and asset prices have adjusted accordingly.

However, I have found that in my dealings with investors over the past six weeks, it is certainly the unknowns that are worrying people now. The question of what is around the corner is ultimately the reason everyone invests in the first place, for, over time, we receive a premium for putting our money to work where others are afraid to.

THE GAUNTLET

This voyage into the unknown has rewarded even the more conservative investors for five years now, with double-digit returns most years providing a welcome boost to beleaguered personal balance sheets.

Such a nice ride was always going to get a bit rocky at some point, and last August saw the arrival of this, seemingly out of nowhere.

China sneezed and the world caught a cold, but we shrugged that episode off fairly quickly. That market wobble last August was of course the pre-cursor to the travails of the last two months, so this correction did not really come as a surprise at all, it was simply a question of when and how far would it go.

The 2008 crash spawned the era of greater discussion between investor and advisor in relation to risk profile, risk capacity and timing. The world was in a financially dark place, and such a trying time led to a greater focus on investor education, a greater demand for information (by investors) and more accurate and available real-time data (due to computing power and the internet).

This recent market downturn sees an Irish investor population that is more informed than ever, so it is interesting to witness how people are reacting.

A media frenzy whipped up a couple of weeks ago, when the oil price sunk further, when the stock markets reached a two-year low and before the election dominated the news

I can say from professional experience that any advice to reduce risk, whether in a private pension plan or investment portfolio, were largely met with absolute agreement over the last few years, even as things rose in value.

This was a marked contrast to the 2005 to 2007 period, when there was an insatiable attitude for more. More borrowing, more risk, can I borrow more money to invest in something with more risk? These last few years were very different.

Suggestions to diversify, introduce safer assets to a portfolio, introduce assets with an income stream and continually re-examine one’s investment timeframe were met with something bordering enthusiasm! Have we all learned something I wonder?

Then the test emerged. A media frenzy whipped up a couple of weeks ago, when the oil price sunk further, when the stock markets reached a two-year low and before the election dominated the news. The gauntlet was thrown and the first real challenge to investors’ confidence in their own financial plans was laid down.

Eamon Dwyer, City Life

One or two investors made hasty appointments to meet with advisors in our office, either looking for a boost of confidence or to confirm their own doubts. But it was only one or two.

RISKY BUSINESS

The next six months will be interesting. Will there be a ‘dash to cash’, or some such knee-jerk reaction by people to market events? Paraphrasing Carl Richards, the commentator on behavioural finance, many investors tend to sell low (after a market downturn) and buy high (when they feel a bit more confident), and then they repeat this until broke!

2008 taught us lessons about diversity, the need to be clear on your investment term and that, yes, the markets always recover with time. It is over the next while where we will look into the whites of investors’ eyes.

We will see were they true to themselves when deciding how much risk they could take, or, no matter what they said, were they always going to try and ‘call’ the market when things got rough.

However; so far, so good.

Photo (above): Omer Unlu